Crypto’s Taxing Predicament

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Posted by Katie McAuliffe, Bryan Bashur on Friday, August 6th, 2021, 2:07 PM PERMALINK

The fight over the cryptocurrency tax reporting provision in the bipartisan infrastructure bill just got a lot more interesting. 

After Senator Rob Portman (R-Ohio) publicly announced he supported a vote on Senator Wyden (D-Ore.), Toomey (R-Pa.), and Lummis’ (R-Wyo.) amendment (No. 2498), he switched gears and filed his own amendment with Senator Warner (D-Va.). Industry leaders and trade associations such as the Blockchain Association, Coinbase, and Coin Center have publicly supported the changes in Wyden-Lummis-Toomey but oppose Portman-Warner. 

As currently drafted, the infrastructure bill would jeopardize the cryptocurrency and blockchain industry’s future in the United States. 

The provision titled “Enhancement of Information Reporting for Brokers and Digital Assets” would likely lead to a host of unintended consequences, not only for the technology’s ability to operate in the United States but also for the privacy rights of all Americans. The last thing the United States government needs to do is regulate the cryptocurrency market to the point where the industry leaves the country entirely. Totalitarian regimes such as the Chinese Communist Party have already kicked out Bitcoin miners much to the benefit of states like Texas who welcome all kinds of business. 

The cryptocurrency language in the bill was hastily thrown together in an act of desperation to pay for its large expenditures. The Congressional Budget Office’s announcement that the bipartisan bill would increase the federal deficit by $256 billion over 10 years underscores the lawmakers’ desire to shore up additional revenue, much to the dismay of the cryptocurrency ecosystem. 

The Joint Committee on Taxation estimated that the language in the bill would raise approximately $28 billion in revenue. ​This is curious since cryptocurrency brokers already report to IRS, so its hard to see where JCT is deriving these new numbers from.​

The Wyden-Lummis-Toomey Amendment addresses a significant concern in the underlying bill. The amendment removes the obligation of network participants, such as miners and software developers, who don’t have—and shouldn't have—access to customer information to report tax information to the Internal Revenue Service. It does so without affecting the reporting obligations placed on brokers and traders of digital assets.

On the other hand, the Portman-Warner Amendment excludes proof-of-work mining and blockchain validators. However, the amendment makes no mention of software developers, node operators, and aggregators thus requiring them to report to the IRS. ​Interestingly, singling out proof-of-work only exempts one technology and does not allow blockchain technology to continue to innovate in the US. These technologies are changing, and the newer proof-of-stake technology is more energy efficient but would not be exempt in the Warner-Portman amendment. It's surprising that the White House and Democrats would put these kinds of limitations on the ability of technologies to become more energy efficient.

The White House has signaled their support for Portman-Warner in an effort to maximize revenue and crack down on digital asset tax avoidance. Unfortunately, this is par for the course for an administration that is obsessed with regulating digital assets all in the name of “investor protection”. 

Tomorrow, the Senate is expected to vote on both of these amendments. What the Senate should not do is be complacent and vote down both of the amendments. ​The Wyden-Lummis-Toomey amendment is best suited to clarify the definition of brokers for crypto purposes without unnecessarily exposing Americans' private information; however, allowing the language in the base text to pass without any changes will undoubtedly require numerous individuals in the cryptocurrency ecosystem to suddenly hand over information to the IRS that they do not possess. 

 

Photo Credit: QuoteInspector.com

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